What happens if—or when—Britain leaves the E.U.?

Douglas Carswell, M.P., has presented the case for “Why Britain Needs A Strong America.” My own contribution to this forum might equally well be titled “Why America Needs a Strong Britain.” I hold that both propositions are true. The actual title I chose is “After the Brexit,” “Brexit” being the term which has arisen lately to describe the idea of a complete British exit from the European Union, but this should not be taken to mean that I am predicting with any certainty that Britain will leave the European Union. I do not pretend to be a prophet. If I were forced to estimate what I thought the odds are of a complete British exit, it would be somewhere between 40 to 60 percent that it will leave the European Union by the year 2020. The actual outcome, however, is so very dependent on events that such a prediction would be of little value at this point.

What is of value now is an exercise in rational planning. To give a historical parallel, recall the situation in 1995, when Canada was approaching the Second Quebec Referendum, and the polling predicted the vote in favor of Quebec secession at around 50 percent. In other words, it was statistically within the margin of error, and it was thus obvious that there was a good chance it might come to pass. Most of the large corporations in North America had, by that point, begun undertaking contingency planning to examine what would happen if Quebec voted yes, and the Quebec government began to negotiate a Quebec exit from the Canadian confederation, or to create some form of looser confederal relationship with the rest of Canada. In this instance, it became critical to attempt to predict what might happen to a company’s branch plans in Montreal, what might happen to its offices in Montreal, what currency it might be dealing in, and so forth. Corporations thought they should look at all the obligations they had incurred in the jurisdiction of Quebec, and how the change might affect them.

This is neither prophecy nor speculative fiction, but merely rational planning. If a corporation had not done such planning prior to a referendum in those circumstances, it would certainly have been liable for a shareholders’ suit for negligence—and a very well-deserved suit at that. So if we consider ourselves all stakeholders in our various countries, as we should, it is time to do some rational forecasting about the idea of a British exit from the European Union. As current opinion polls show a plurality of British voters favoring exit, the odds of it happening are too high to ignore the possibility.

Those people who believe that Britain should not leave the European Union can’t wish the possibilty away—it’s too likely an outcome at this point. Personally, I am an “Outer”: an advocate of a Brexit. But what interests me is what one might call the architecture of the Anglosphere after Brexit. That is to say, what is of interest are the options for how Britain would structure its relations with the United States and the other English-speaking countries that would be created by a Brexit. It has been my opinion that such relationships would be a large part of the solution for Britain, particularly but not exclusively to its trade arrangements.

As many people have not paid a lot of attention to this issue to date, it may be useful to review some basic facts of the matter. Britain, in accordance with the series of European treaties to which it is party, has the right to withdraw from the European Union. The process is as follows: Once a political decision has been made on the U.K. side, its government transmits to Brussels a notice of the intent to withdraw. Under Article 50 of the Lisbon Treaty, the European Union then has an obligation to negotiate in good faith with the departing country to determine what kind of trade and other ties can be done in lieu of E.U. membership, with the objective of minimizing the disruptions that would be caused by Britain’s departure. Such disruptions are particularly obvious in the area of trade; there is a great deal of cross-border (i.e. U.K.–E.U.) trade—about 50 percent of Britain’s total trade, depending on how you calculate it.

Several considerations must be taken into account in regard to U.K.–E.U. trade. One is that at the time Britain joined the predecessor of the European Union, the average Continental tariffs against British imports were in the order of 30 percent of value. Thanks to the series of GATT and WTO agreements made since then, such tariffs would now have been forced down to about 3 percent, even if Britain had never joined the European customs union. So Britain would not revert to the status quo ante in regard to European trade after a Brexit. The more important issue lies in the very tight cross-border trade items, where it is not just the tariff level that matters, but all the other arrangements for easy transit of goods and manufacture back and forth. For instance, Britain is a partner in the manufacture of Airbus airliners. In this partnership it produces components that are then airfreighted to the Continent for assembly; in other words, it is just-in-time manufacturing across borders. That would probably require special arrangements in order to continue. Such special arrangements, however, need not rise to the level of integration of a customs union.

Consider, for instance, that America and Canada have similar cross-border component manufacturing arrangements without anything near the level of political or institutional integration that Europe has. One figure of which most people are not aware is that many cars manufactured in North America can cross the U.S.–Canada border up to five times before they are completed. Manufacturers often do part of the process on one side of the border, truck it across to a plant on the other side, do more work on it there, ship it back, forth, and so on. That is very tight integration done without a customs union or any of the integrative mechanisms that the European Union requires of its members.

This experience stands as an existence proof that much of the cross-border trade between the United Kingdon and the European Union could continue with relatively simple arrangements comparable to North American arrangements. Hopefully the Article 50 negotiations would deliver a series of such arrangements, which would mean that Britain’s trade with the Continent could continue at something near its current levels. There would likely be some decrease at first, merely because of market adjustments. Perhaps some of it would be a result of spite on the European side, but since at present the European Union has a positive trade balance with the United Kingdom (i.e., they export more to the United Kingdom than the United Kingdom does to them), it would really be a case of “cut off their nose to spite their face” to try to reduce that, especially considering the current (and likely future) unemployment levels on the Continent.

Given such considerations, it is reasonable to expect that substantial post-Brexit trade ties will continue between the U.K. and the European Union, perhaps coming near to maintaining current levels. Still, once the U.K. is outside of the European customs union, it is free to strike trade deals for itself, or to join other trade areas or trade arrangements to increase its trade with the rest of the world. The fact is, the E.U.’s external barriers are fairly substantial in a number of areas, including many in which Britain is a competitive exporter. In E.U. trade talks with potential partners, it is usually the case that various Continental protectionist interests tend to be the limiting factor on striking open deals, to the detriment of British trade. Therefore, it may well be possible to strike better deals on bilateral U.K. trade agreements or on multilateral agreements to which the European Union is not a partner.